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Volatility remains high, but a bullish reversal near support may provide a bounce over the near-term.

Having ‘only’ fallen over 12% from its high, the S&P500 is yet to breach the -20% threshold to confirm a bear-market. Another supportive feature eyed by the bull-camp is the cluster of structural lows between 2532.69 – 2603.54 which will do their best to catch a falling knife. Furthermore, these support levels may be a deterrent for bears on the sidelines due to the unfavourable reward to risk, whilst tempting current bears to book a profit. 

However, before we get too bullish it’s worth highlighting that day to day volatility has risen notably since October and the magnitude of bearish days has outperformed bullish ones. Taken in this context, it’s not too difficult to see why bears may be licking their lips if prices begin to recover.

Either way, whilst we wait to see which camp claims victory, range trading strategies appear the more appealing until a clearer trend develops. 

We can see on the daily chart that a bullish hammer has formed near structural lows. Furthermore, the S&P500 has carved out a range around 2600-2800 where price action has provided large swings interconnected by one-day reversal patterns. The two prior rallies within this range have appreciated by 6.5% and 8.5% respectively which, if to be repeated, could see the index around 2750 or 2800. Interestingly the VIX currently implies an 82.7 point move for S&P500 over the next week (in either direction) which suggests an upside target of 2716.44, which would keep it in range. 

A break above the hammer high suggests the swing low is in place, and traders can use the 2708.54 high as an interim target which sits near the centre of the range. Before considering a short setup, we’d want to see another bearish reversal pattern below the upper range, or a clear break below 2532.69.

Matthew Simpson CFTe,Senior Market Analyst (Asia)